Sticky decision for scheming suitors

Glasgow rock band Franz Ferdinand famously sang “why don’t you walk away", but takeover suitors will be forced to think very hard about doing so after a Takeovers Panel decision yesterday which makes it harder for them to renege on a deal prior to its consummation.

Given the growing popularity of schemes of arrangement – almost twice as many friendly deals were conducted by way of a scheme than a traditional takeover in the 2010 fiscal year, according to data from law firm Freehills – the decision in
BC Iron
is significant because it illustrates the panel’s keenness to protect the market from surprises when deals are being done via a scheme.

This is important because shareholder protections under schemes are not as thorough as those in the Corporations Act governing traditional takeovers, where Chapter 6 creates a policy of certainty around bids.

For example, section 631 states the terms of a bid “must be the same as or not substantially less favourable" than those set out in the public announcement of a deal and failure to comply constitutes a criminal offence.

But after the BC Iron decision – in which the panel declared it unacceptable for Hong Kong-listed Regent Pacific Group to have walked away from its $345 million offer for BC Iron based on a termination right it had not disclosed – the gap in shareholder protections under schemes and traditional takeovers is closing.

As Freehills partner Tony Damian observed yesterday: “The panel has demonstrated that in schemes, it will have no hesitation in getting involved when issues of market integrity are at stake."

The panel did not release reasons yesterday. But when it does, they are likely to say it is not acceptable for the market to be surprised when a suitor walks away.

And surprise was exactly the reaction to BC Iron’s March 15 announcement that Regent would terminate the “scheme implementation agreement" that both companies entered into on January 20. Regent suggested its board had withdrawn support for the deal following statements attributed to BC Iron’s major shareholder, Consolidated Minerals, in an internet blog on February 13 that it would block the deal. BC Iron told the ASX on February 15 the article was “highly misleading" and its discussions with ConsMin had been “positive and constructive".

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But whether the article provided a reasonable basis to terminate the SIA was not likely to have influenced the panel. Rather, the decision turned on the lack of disclosure about termination rights.

When BC Iron and Regent announced their deal on January 21, their summary of the key terms –including termination rights – failed to disclose the right on which Regent ultimately relied: the ability to terminate if the Regent board changed its recommendation on the deal.

This failure meant that over the two months since the deal was announced, “control over voting shares in BCI has not taken place in an efficient, competitive and informed market", the panel said.

The decision may not force Regent to carry through with the deal because of other termination rights – disclosed from the outset.

The deal is conditional on the availability of debt finance, which was terminated when Regent withdrew the offer. Regent said yesterday it was “exploring the possibility" of the debt funding being reinstated on the same terms, but “there is no certainty that this will be achievable" – and without it the deal can’t proceed.

It is also conditional on Regent shareholder approval – not yet attained. Once the state of financing becomes clearer, Regent’s board is expected to reassess its recommendation that shareholders support the deal; if it can convince them not to, it will also be scuttled.

But the legacy of the BC Iron decision will be to force suitors using schemes to consider disclosing their SIA, or at the very least to ensure all exit rights are made public at the outset of a deal.